HLTH 4383 Module 4 Budget Variance Analysis Example

Two Cases Short and Three Knees Off Contract: A First-Quarter Variance Analysis of an Ambulatory Surgery Center's Joint Replacement Program

Student Name

American College of Education

HLTH4383: Finance for Healthcare Administrators

Module 4 Assignment

Instructor Name

October 26, 2026

The Result to Explain

The joint replacement program at our composite ambulatory surgery center completed its first quarter on March 31, 2027. The budget prepared in the previous module expected 18 cases and a program margin of about $20,300 for the quarter. The program performed 16 cases and lost about $4,900. The total unfavorable variance of roughly $25,100 is large relative to a quarter's results, and the board will ask whether it means the program is failing or only that its first months were harder than planned.

A static comparison of budget and actual cannot answer that, because it mixes the effect of doing fewer cases with the effect of spending differently on each case. This analysis uses a flexible budget, which restates the budget at the actual volume, so that each variance can be traced to its cause (Penner, 2017). A variance is labeled favorable when it raises the margin and unfavorable when it lowers it.

Volume and Payer Mix

Two fewer cases than budgeted is the first cause. One of the two starting surgeons began three weeks late while his privileges at the center were finalized, and two patients were postponed when preoperative laboratory results fell outside the selection criteria. At budgeted rates, the flexible budget for 16 cases shows revenue of $168,320 rather than $189,360, a volume variance of $21,040 unfavorable. Because variable costs also fall with fewer cases, by $11,868, the net effect of volume on the margin is $9,172 unfavorable, exactly two cases times the $4,586 contribution margin per case.

The payer mix explains another $5,120. The budget assumed 60% commercial patients, but the first 16 split evenly, eight commercial and eight Medicare Advantage, because the first surgeon to start has an older practice. Actual revenue was $163,200. The mix variance is real, but it reflects one surgeon's patients over one quarter, and the second surgeon's schedule for April is 70% commercial.

Implant Spending

Implants cost $72,480 against a flexible budget of $65,600, an unfavorable spending variance of $6,880. Splitting it into price and usage shows two different problems. The price variance is $3,600: in three cases, the surgeon who started late used a knee system from a vendor outside the center's contract, at $5,300 each instead of $4,100, because it is the system he has used for 15 years. The usage variance is $3,280: four patients needed a tibial stem extension and extra cement, about $820 each, for bone quality problems found in surgery.

The usage variance is clinical and largely unavoidable, although the preoperative screening could flag patients likely to need extra components so that the budget anticipates them. The price variance is a management problem. Boylan et al. (2019) evaluated a preferred single-vendor program for hip and knee implants and found per-case implant costs fell by 23% for cases using the preferred vendor with no significant change in readmission or surgical site infection, but they also found that adoption was lowest among very high-volume surgeons, whose use of the preferred vendor barely moved. The contract saves money only in the hands of surgeons who use it, and the most experienced surgeons are the hardest to move.

Labor

Direct labor cost $11,390 against a flexible budget of $8,544, an unfavorable variance of $2,846. The budget assumed 9.4 staff hours per case at an average rate of about $56.81. Actual hours were 179.2 for 16 cases, or 11.2 per case, compared with 150.4 hours in the flexible budget. The efficiency variance, the extra hours multiplied by the budgeted rate, is $1,636 unfavorable. Most of the extra time was in the operating room, where cases averaged 2.7 hours instead of 2.2 as the team learned new instrument sets, and in recovery for the first patients, whose nerve blocks were monitored longer than the protocol requires.

The rate variance, the difference between the actual and budgeted rate multiplied by actual hours, is $1,210 unfavorable. The actual rate averaged $63.56 because five cases ran past 5 p.m. on days before the evening recovery shift had been added, and the nurses who stayed were paid overtime. Both labor variances should shrink as the team gains experience, but operating room minutes per case need to be tracked monthly to confirm that they do.

Other Costs

Other supplies and drugs exceeded the flexible budget by $560, mostly from additional local anesthetic used for the surgeons' preferred joint infiltration technique. Sterile processing, home equipment and linen matched the flexible budget. Fixed and one-time costs together were $950 over budget: evening recovery staffing came in $3,150 under because the extra shift began in February, education materials ran $1,400 over after a reprint, and competency training ran $2,700 over because four per diem nurses joined after the first session. The denial allowance was $392 lower than budgeted because it is calculated on actual revenue.

Putting the Variances Together

The variances reconcile to the total. Volume cost $9,172 net of variable savings, payer mix $5,120, implant price $3,600, implant usage $3,280, labor efficiency $1,636, labor rate $1,210, supplies $560 and fixed and one-time costs $950, offset by $392 from the allowance, for a total of $25,136 unfavorable. Grouped by cause, about 57% of the shortfall came from volume and mix, which reflect the program's start rather than its economics; about 27% came from implant spending; and the rest came from labor and minor lines.

The analysis does not show a program that is failing. At budgeted rates, the 16 cases would have produced a contribution margin close to plan. What it shows is a slow start, a mix skewed by one surgeon, and a contract that one surgeon is not using.

Actions

The administrator should take four actions. First, the lead surgeon and the administrator should meet with the surgeon using the off-contract system to review the contract's clinical options and the cost difference, and the center should ask the contracted vendor whether its system can match the features he values; if not, the board should decide whether to allow the exception at a negotiated price. Putting the actual prices on the table matters more than it might seem. In a pricing test given to hundreds of orthopedic attendings and residents by Okike et al. (2014), most guesses about what common devices cost missed by more than a fifth, so the surgeon may simply not know that each of his knees costs the center $1,200 more than the contracted system. Second, preoperative screening should flag patients with poor bone quality so that the budget reflects expected component use. Third, operating room minutes per case and overtime hours should be reported monthly, with a target of returning to 2.2 hours by the 50-case review. Fourth, the second-quarter forecast should be updated to reflect the confirmed April schedule rather than the original phasing, so that the next comparison measures performance against a realistic plan.

References

Boylan, M. R., Chadda, A., Slover, J. D., Zuckerman, J. D., Iorio, R., & Bosco, J. A. (2019). Preferred single-vendor program for total joint arthroplasty implants: Surgeon adoption, outcomes, and cost savings. The Journal of Bone and Joint Surgery, 101(15), 1381-1387. https://doi.org/10.2106/JBJS.19.00008

Okike, K., O'Toole, R. V., Pollak, A. N., Bishop, J. A., McAndrew, C. M., Mehta, S., Cross, W. W., Garrigues, G. E., Harris, M. B., & Lebrun, C. T. (2014). Survey finds few orthopedic surgeons know the costs of the devices they implant. Health Affairs, 33(1), 103-109. https://doi.org/10.1377/hlthaff.2013.0453

Penner, S. J. (2017). Economics and financial management for nurses and nurse leaders (3rd ed.). Springer Publishing.